Thursday, March 29, 2012

Wedge Partner's Brian Blair is out telling clients to cash in their chips in Apple (NASDAQ:AAPL):

Taking the Sidelines Until March Qtr Report on Possible iPad Slide

We are bullish on Apple, and we consistently have been, holding a positive view of the company and calling it the best name in tech on the growth of the iPhone and the iPad. Although that view hasn't changed, we wanted to highlight something we have noticed of late that gives us pause, and forces us to take the sidelines here at nearly $620 per share. Why? We’re concerned iPad sales may not be as strong as expectations, and we believe March could disappoint and full year production iPad expectations/forecasts may be pulled down as a result.

But What about the 3 Million Units?The opening weekend number of 3 million was significant, and of course spoke mostly to pre-orders and to strong weekend sales from Apple’s biggest fans, but in looking at the overall demand picture, there doesn't appear to be as much of a frenzy as we expected over the new iPad. We can walk into any Apple store and get one today, easily, and that may be a problem, given rising expectations. If existing units in the channel take longer than expected to be digested by consumers, then manufacturing will be pulled back in the June quarter, and estimates for the full year will also be pulled down.

Our iPad Unit Expectations for 2012We had expected around 9-10 million units for March, a lofty number coming off December, but have noted some expectations jumping to the 12 - 13 million unit range for this quarter. Our iPad unit expectations for CY 2012 have been between 56-60 million units and we have believed 60+ million was possible. We now believe that the full year number will likely be at the bottom of that range, possibly lower. We will reassess our unit expectations post Apple’s quarter report.

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REMOVED

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The Risks: High Expectations Too High for MarchIn summary, given the lofty expectations for Apple, and the recent 63% rise in share price from $380 in December to $620 yesterday, along with the litany of $700+ price targets (we have counted over 9) and raised numbers across the Street, we feel it’s prudent to take the sidelines at these levels until the company reports earnings. We see a potential disconnect, between the rising price targets/unit expectations and the broad availability of the new iPad, and pieces of evidence that suggest a potential for waning demand in the U.S. The stock may be priced for perfection at current levels, but we feel we are seeing signs of some scratches on the glass, which is reason enough to step aside for now.

Notablecalls:This is big. AAPL will be down on this. 10-15 pts. Actionable Call ALERT

Wednesday, March 14, 2012

Morgan Stanley, the uber Bull of Apple (NASDAQ:AAPL) is raising their Bull case PT to $960 this morning:

They see further upside to AAPL shares on meaningful EPS revisions as their new CY13 base / bull case EPS estimates of $60 / $80 are 24% / 65% above consensus. Firm new official $720 PT (prior $515) conservatively assumes no multiple expansion. AAPL has been added to Morgan Stanley’s Best Ideas list.

Investors still underestimate the potential earnings upside at Apple. Apple trades at 9.5x firm's base case and 7.1x their bull case CY13e EPS and Morgan Stanley’s What’s in the Price analyzer suggests AAPL shares discount just 2% growth longer-term. They see several potential EPS upside drivers based on their proprietary work which they incorporate in their new bull case: 1) enterprise tablet adoption combined with demand upside from lower priced iPad; 2) strong upgrade cycle to LTE (Long Term Evolution) capable iPhone starting later this year; 3) emerging market iPhone (plus iPad, Mac) growth driven by new carriers. China Mobile alone could add more incremental iPhone shipments than the Street models in total for CY13; 4) margin upside from lower ASP declines, increased mix of mobile devices and recent capital investments.

1) Enterprise tablet adoption combined with demand upside from lower-priced iPad. The pace of enterprise tablet adoption is exceeding expectations, according to Morgan Stanely's January 2012 CIO survey. Fifty-six percent of US companies already purchase tablets for corporate use, compared to a 51% expected penetration a year ago. Assuming Apple maintains its 80% share of the enterprise tablet market, iPad purchases by enterprises could account for 9 million units and $5 billion in iPad revenue in CY12. This is in addition to consumer purchases of iPads, some of which will also be used in the enterprise.

2) iPhone estimates don’t credit Apple for the potential share gains when it launches an LTE-capable device in 2H12. MSCO supply chain checks suggest Apple’s sixth generation iPhone could include several changes that, in their view, will increase the upgrade rate relative to past product cycles. In particular, iPhone 5 is likely to include a higher-resolution and potentially thinner screen, new casing material, faster processor, and quad-mode baseband chip that works on multiple flavors of 3G and LTE. Their December US survey indicated that 62% of iPhone owners planned to upgrade to the new version, iPhone 4S. Assuming a similar upgrade rate for the LTE iPhone due out later this year, this implies 148M and 160M upgrade purchases in their base and bull case. The remaining 38M and 86M shipments would come from new users, roughly split between emerging markets and mature markets. For perspective, the same math implies Apple added roughly 48M new users in CY11.

3) China and other emerging markets, like Brazil, remain huge untapped markets. The emerging markets remain a huge opportunity for upside long term due to attractive demographics. Smartphone penetration is highest among cell phone users 25 to 34 years old, according to Nielsen. The emerging markets have nearly 14x the population in this age range than Western Europe and North America.

Despite being well above investor expectations Morgan Stanley views their CY13e bull case $80 EPS / $960 valuation as reasonable given: 1) Apple’s CapEx forecast predictsva similar revenue trajectory; 2) they don’t include new product categories like TV and low-price iPhone; 3) Firm's CY13 bull case iPad forecast of 129M units is in-line with what our AlphaWise surveys imply for CY12; 4) iPhone growth ex-China only assumes an average upgrade rate and a new subscriber number similar to CY11; 5) they assume no multiple expansion despite a possible dividend.

Notablecalls: So there you go, we're almost at $1000 price target. Good thing it's coming from MSCO and not some boutique trying to make a name for themselves.

Needless to say, expect new highs for the stock today. A sentiment call.

Thursday, March 08, 2012

William Blair's Jason Ader & his team are upgrading Aruba Networks (NASDAQ:ARUN) this morning to Outperform from Market Perform.

- Their bullish stance is based on three main drivers:

1) the emergence of BYOD (bring your own device) in the enterprise, which makes mobility a strategic priority for IT departments, and they believe is still in the early innings (iPad 3 launch);

BYOD will sustain and potentially accelerate WLAN secular market growth;Aruba best positioned vendor for BYOD. Firm believes that the BYOD phenomenon is only getting stronger, creating a paradigm shift in the way IT managers think about their networks and the devices, operating systems, and applications they need to support. The trend of employees bringing their own devices to work rather than using corporate-issued devices is still in the early innings, based on WBLR checks, and makes mobility a strategic priority for IT departments that fundamentally changes the discussion with an IT manager. This should sustain and potentially accelerate demand for WLAN solutions and puts Aruba in the catbird seat, given its technical DNA and large enterprise focus.

Aruba continues to take share; a two horse race in large enterprise. William Blair believes that Aruba’s competitive standing continues to improve, especially in the large enterprise focus area, where it has become a two-horse race between Cisco (CSCO $19.41; Market Perform) and Aruba, according to their checks, and where Aruba’s comprehensive management and security features really stand out. In the most recent January-ending quarter, Aruba appeared to gain share against market leader Cisco as evidenced by the company’s product year-over-year growth rate of 34%, compared to Cisco’s 25% growth in the same time period.

3) Aruba’s valuation has come down to earth, with the stock currently trading at 23 times WBLR calendar 2013 earnings estimate; they believe this bakes in the current revenue deceleration that the company is experiencing, but fails to account for potential revenue reacceleration as BYOD/tablets garner mass adoption in the enterprise and Aruba’s exit from the China hotspot business no longer hurts year over- year comparisons (firm is conservatively modeling the inflection point on year-over- year revenue growth to occur in the upcoming January quarter). They further believe the analyst day on March 28 will be a positive catalyst for the stock, as investors better appreciate how the BYOD phenomenon has caused a fundamental change in the way enterprise networks need to be built and managed, and how strategically positioned Aruba is for this transition to a mobility-centric world.

Valuation and expectations have come down to earth. Current Street consensus estimates call for 30% and 21% top-line growth in fiscal 2012 and 2013, respectively, which we believe leaves ample room for outperformance, given the company’s track record of exceeding expectations.

Notablecalls: Ader & his crew move these names. Sometimes big, 6-10%. I expect this to be the case today. Period.

Monday, March 05, 2012

Morgan Stanley is making some fairly positive comments on Molycorp (NYSE:MCP) saying falling rare earths prices have started to attract customers again.

- They think REO prices, down 25% YTD, have reached a level that will drive demand. A recovery in heavy REO prices may already be under way, with yttrium up in February. Heavy REOs should be followed by magnetic REOs (crucial to MCP’s earnings). MCP shares price in REOs at 30% of spot at full capacity.

Firm is reiterating Overweight rating and $81 PT.

The details:

Favorable seasonality from March should help absorb market surplus. REO prices are down 25% YTD. While REO inventory in China and illegal mining could prolong the price decline, we sense an increase in interest from consumers. Japanese REO imports normally pick up in March-May. We expect a seasonal pickup in demand to help stabilize prices by mid-2012. At $55/kg, spot prices are in the range where price-sensitive buyers may start returning, based on our channel checks.

Heavy REOs should lead a price recovery, followed by magnetic REOs (crucial to MCP’s earnings). Export offer prices for yttrium oxide (a heavy REO) have increased on tighter export quotas for heavy REOs. Magnetic REOs could be next to stabilize as their fundamentals are better than for light REOs. One of the magnetics, samarium, recently registered a modest uptick in price. Samarium has a similar end use (magnets) as neodymium and praseodymium, which contribute ~75% of our ‘13e revenues. Even buyers of cerium (a light REO) are reported to be returning to the market, though recent offers at ~$18/kg (vs. a reported spot of $28) suggest it could fall more before stabilizing.

Notablecalls: Molycorp (NYSE:MCP) has become a kind of a consensus short of late, evidenced by the 40%+ short interest in the name.

Now we have Morgan Stanley, a Tier-1 firm calling for a possible bounce in REO prices, helped by increased demand. That could cause a squeeze in the name, considering the stock is pricing in REOs at 30% of spot.

I checked with several brokers and Molycop (MCP) was on the "hard-to-borrow" list at almost all of them. Makes me say hmm..

If this gets around, say hello to $27.50-29.00 range in the coming days, regardless if the REO bounce sticks or not.

- Firm is cutting their RIM estimates and target based on their belief that there is a greater than 50% chance that RIM will negatively pre-announce the Feb quarter. They believe sales of both RIM's low-end and higher-end phones continue to be challenged. Jeffco believes consensus estimates for FY13 are too high and revise their FY13 EPS estimate to $1.87 (JEF prior $2, St $3.07). Firm cuts their target to $12 and reiterate their Underperform rating.

The details:

Preliminary survey work and checks indicate a missed quarter. We believe there is a greater than 50% chance that RIM will negatively pre-announce the Feb quarter and that RIM will miss the low-end of their 11M to 12M guidance range. We adjust our Feb quarter estimates from 12M units to 10.5M units and revenue/EPS to $4.2B/$0.69 (JEF prior $4.6B/ $0.82, St $4.6B/$0.83). If RIM does make their guidance we believe the difference between sell-in and sell-through would cause a correction in the May quarter suggesting a very weak guide for May. Either way we see consensus numbers as too high.

Sales of RIM's low-end handsets are deteriorating across geographies. We believe RIM's low-end handset sales trends have continued to deteriorate in North America, Latin America and Europe. In particular, sales in Europe decreased significantly towards the end of the quarter. We believe this is very negative as sales outside of the U.S. had typically been more resilient. Our checks indicate that sales in Asia seem to be okay.

Higher-end handsets continue to be challenged by iPhone and Android. We believe higher-end handsets are doing poorly outside of Enterprise sales with continued iPhone 4S and Android momentum (especially Samsung) causing issues. We believe an iPhone 5 launch (we expect end of Q2/Q3) ahead of the BB10 launch (we expect Sep) will be particularly troubling. The BB10 will also have to compete head-to-head in H2 with Microsoft/Nokia as the Windows 8 platform attempts to become the #3 player. Moreover, we believe RIM will not launch any major new handsets before BB10.

We believe Street estimates for FY2013 are too high. We are cutting estimates our FY13 EPS estimates from $2.00 to $1.87 (St $3.17). We believe Street numbers will likely be revised down given the lack of major new products in the near-term and continued sales challenges due to competitive pressure from both low-end and high-end devices.

Notablecalls: Note this call comes after another well-timed RIM downgrade by Misek. The stock is likely to get hit on this but it also manages the expectations. So once the warning comes, you may be served best taking the other side of the trade s-t.